10-Q 1 redtone10q02292016.htm 10-Q

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: February 29, 2016

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File No. 333-129388

REDTONE ASIA, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
 
Nevada
(State or Other Jurisdiction of
Incorporation or Organization)
 
71-098116
(I.R.S. Tax I.D. No.)
Unit 15A, Plaza Sanhe, No. 121 Yanping Road, JingAn District 200042 Shanghai, PRC
(Address of Principal Executive Offices)
 
(86) 61032230
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ☐
 Non-accelerated filer  ☐
 
Accelerated filer  ☐
(do not check if smaller reporting company)
 Smaller reporting company 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐    No 

State the number of shares outstanding of each of the issuer's classes of common equity, as of February 29, 2016, are as follows:
 
 
Class of Securities
Shares Outstanding
Common Stock, $0.0001 par value
282,315,356

Transitional Small Business Disclosure Format (check one): Yes ☐      No  




REDtone Asia, Inc.


TABLE OF CONTENTS


 

PART I – FINANCIAL INFORMATION

 
ITEM 1.   FINANCIAL STATEMENTS

REDtone Asia, Inc.
As of Quarter Ended February 29, 2016 (unaudited)

TABLE OF CONTENTS

Condensed Consolidated Balance Sheet as of February 29, 2016 (unaudited) and May 31, 2015 (Audited)
3
Condensed Consolidated Statements of Operations and Comprehensive Income for the Nine months and Three  months ended February 29, 2016 and February 28, 2015 (unaudited)
4
Condensed Consolidated Statement of Cash Flows (unaudited) for the Nine months ended February 29, 2016 and February 28, 2015 (unaudited)
5
Notes to the Condensed Consolidated Financial Statements (unaudited)
6–17

 
REDTONE ASIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At February 29, 2016 and May 31, 2015
 

   
February 29, 2016 (Unaudited)
   
May 31, 2015 (Audited)
 
Assets
           
Current assets
           
Cash and cash equivalents
 
$
4,303,838
   
$
5,062,576
 
Inventories
   
3,750
     
3,951
 
Accounts receivable
   
870,824
     
825,790
 
Other receivables and deposits
   
558,669
     
361,780
 
Total current assets
   
5,737,081
     
6,254,097
 
                 
Property, plant and equipment, net
   
3,487,913
     
3,803,404
 
Intangible assets, net
   
1,633,337
     
1,777,171
 
Goodwill
   
-
     
377,171
 
                 
Total assets
   
10,858,331
     
12,211,843
 
                 
Liabilities and stockholders' equity
               
Liabilities
               
Current liabilities
               
Deferred income
   
1,271,677
     
794,435
 
Accounts payable
   
273,871
     
781,362
 
Accrued expenses and other payables
   
849,018
     
883,459
 
Amount due to a related company
   
1,942,625
     
2,033,852
 
Taxes payable
   
701,142
     
656,242
 
Total current liabilities
   
5,038,333
     
5,149,350
 
                 
Deferred tax liabilities
   
(4,511
)
   
-
 
                 
Total liabilities
   
5,033,822
     
5,149,350
 
 
               
Equity
               
Common stock, US$0.0001 par value , 300,000,000 shares authorized; 282,315,356 shares issued and outstanding, respectively
   
28,232
     
28,232
 
Additional paid in capital
   
7,726,893
     
7,726,893
 
Less: Amount due from a related company
   
(3,223,971
)
   
(3,289,447
)
Retained earnings
   
1,346,642
     
2,141,129
 
Accumulated other comprehensive income
   
444,478
     
836,582
 
Total stockholders' equity
   
6,322,274
     
7,443,389
 
Non-controlling interests
   
(497,765
)
   
(380,896
)
Total equity
   
5,824,509
     
7,062,493
 
                 
Total liabilities and stockholders' equity
   
10,858,331
     
12,211,843
 
                 

See accompanying notes to the condensed consolidated financial statements.
 
REDTONE ASIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Nine months and Three months ended February 29, 2016 and February 28, 2015

 
   
Nine months ended February 29, 2016 (Unaudited)
   
Nine months ended February 28, 2015 (Unaudited)
   
Three months ended February 29, 2016 (Unaudited)
   
Three months ended February 28, 2015 (Unaudited)
 
Continuing operations
                       
Revenue
   
4,514,988
     
6,097,699
     
1,364,041
     
1,536,250
 
Other income and gains
   
83,053
     
151,229
     
10,296
     
20,125
 
Service costs
   
(3,260,970
)
   
(4,858,845
)
   
(894,332
)
   
(1,267,397
)
Personnel cost
   
(548,191
)
   
(626,758
)
   
(234,699
)
   
(250,330
)
Depreciation expense
   
(381,320
)
   
(391,596
)
   
(101,380
)
   
(133,622
)
Amortization expense
   
(118,825
)
   
(106,455
)
   
(45,901
)
   
(33,240
)
Administrative and other expenses
   
(1,137,652
)
   
(722,580
)
   
(672,878
)
   
(228,194
)
                                 
Loss before provision for income taxes
   
(848,917
)
   
(457,306
)
   
(574,853
)
   
(356,408
)
Income tax (expense)/ income
   
(85,905
)
   
(12,072
)
   
2,925
     
(19,460
)
                                 
Net loss before non-controlling interest
   
(934,822
)
   
(469,378
)
   
(571,928
)
   
(375,868
)
Share of results by non-controlling interest
   
140,335
     
46,904
     
158,671
     
20,575
 
                                 
Net loss from continuing operations
   
(794,487
)
   
(422,474
)
   
(413,257
)
   
(355,293
)
                                 
Discontinued operations
                               
Net loss
   
-
     
(104,018
)
   
-
     
-
 
Gain on disposal of subsidiaries
   
-
     
1,010,987
     
-
     
-
 
                                 
Net income from discontinued operations
   
-
     
906,969
     
-
     
-
 
                                 
Net (loss)/ income for the period
                               
Net (loss)/ income before non-controlling interest
   
(934,822
)
   
437,591
     
(571,928
)
   
(375,868
)
Share of results by non-controlling interest
   
140,335
     
46,904
     
158,671
     
20,575
 
Net (loss)/ income for the period
   
(794,487
)
   
484,495
     
(413,257
)
   
(355,293
)
                                 
Other comprehensive loss
                               
Loss on foreign currency translation of continuing operations
   
(392,104
)
   
(49,512
)
   
(130,061
)
   
(32,761
)
Share of other comprehensive income/ (loss) by non-controlling interest
   
23,466
     
470
     
13,362
     
(444
)
Other comprehensive loss attributable to shareholders of the Company
   
(368,638
)
   
(49,042
)
   
(116,699
)
   
(33,205
)
Gain on foreign currency translation of discontinued operations
   
-
     
17,162
     
-
     
-
 
Total other comprehensive (loss)/ income
   
(368,638
)
   
(31,880
)
   
(116,699
)
   
(33,205
)
                                 
Total comprehensive (loss)/ income
                               
- Attributable to continuing operations
   
(1,163,125
)
   
(471,516
)
   
(529,956
)
   
(388,498
)
- Attributable to discontinued operations
   
-
     
924,131
     
-
     
-
 
                                 
Total comprehensive (loss)/ income
   
(1,163,125
)
   
452,615
     
(529,956
)
   
(388,498
)
                                 
(Loss)/earnings per share, basic and diluted
                               
– continuing operations
   
-
     
-
     
-
     
-
 
– discontinued operations
   
-
     
-
     
-
     
-
 
Weighted average number of shares
   
282,315,356
     
282,315,356
     
282,315,356
     
282,315,356
 
 
See accompanying notes to the condensed consolidated financial statements.
REDTONE ASIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended February 29, 2016 and 2015

   
Nine months ended February 29, 2016 (Unaudited)
   
Nine months ended February 28, 2015 (Unaudited)
 
Cash flows from operating activities
           
Cash flows from continuing operating activities
           
Net loss before non-controlling interest
   
(934,822
)
   
(469,378
)
Adjustments to reconcile net income to net cash used in operating activities:
               
Amortization expense
   
118,825
     
106,455
 
Depreciation expense
   
381,320
     
391,596
 
Deferred tax income
   
(4,648
)
   
(4,797
)
Impairment of Goodwill
   
377,171
     
-
 
Changes in operating assets and liabilities:
               
(Increase)/ Decrease in accounts receivable
   
(45,034
)
   
681,103
 
Decrease/(Increase) in inventories
   
201
     
(46,652
)
(Increase)/Decrease in other receivables and deposits
   
(196,889
)
   
384,372
 
Increase in tax recoverable
   
-
     
(60
)
Increase in deferred income
   
477,242
     
935,590
 
Decrease in accounts payable
   
(507,491
)
   
(1,552,228
)
Increase/(Decrease) in tax payables
   
44,900
     
(44,103
)
(Decrease)/ Increase in accrued liabilities and other payables
   
(34,441
)
   
450,660
 
                 
Net cash (used in)/ generated from continuing operating activities
   
(323,666
)
   
832,558
 
Net cash used in discontinued operating activities
   
-
     
(113,811
)
                 
Net cash (used in)/ generated from operating activities
   
(323,666
)
   
718,747
 
                 
Cash flows from investing activities
               
Cash flows from investing activities – continuing operations
               
Purchase of property, plant and equipment
   
(256,592
)
   
(110,515
)
Decrease/(increase) in amount due from a related company
   
65,476
     
(30,243
)
Increase in interest in subsidiaries
           
(1,722,666
)
Proceeds from disposal of subsidiaries
   
-
     
4,565,935
 
                 
Net cash (used in)/provided by continuing investing activities
   
(191,116
)
   
2,702,511
 
Net cash used in discontinued investing activities
   
-
     
(1,590,743
)
                 
Net cash (used in)/provided by investing activities
   
(191,116
)
   
1,111,768
 
                 
Cash flows from financing activities
               
Cash flows from continuing financing activities
               
Decrease in amount due to discontinued operations
   
-
     
(1,375,268
)
(Decrease)/ Increase in amount due to related companies
   
(91,227
)
   
5,580
 
 
               
Net cash used in continuing financing activities
   
(91,227
)
   
(1,369,688
)
Net cash flows from discontinued financing activities
   
-
     
-
 
                 
 Net cash used in financing activities
   
(91,227
)
   
(1,369,688
)
                 
Net (decrease)/increase in cash and cash equivalents
               
Continuing operations
   
(606,009
)
   
2,165,381
 
Discontinued operations
   
-
     
(1,704,554
)
                 
     
(606,009
)
   
460,827
 
                 
Effect of exchange rate changes
               
Continuing operations
   
(152,729
)
   
(165,886
)
Discontinued operations
   
-
     
17,162
 
                 
     
(152,729
   
(148,724
)
                 
Cash and cash equivalents at beginning of period
               
Continuing operations
   
5,062,576
     
2,991,276
 
Discontinued operations
   
-
     
1,687,392
 
                 
     
5,062,576
     
4,678,668
 
Less: Cash and cash equivalents included in assets held for sale
   
-
     
(1,687,392
)
                 
Cash and cash equivalents of continuing operations at beginning of period
   
5,062,576
     
2,991,276
 
                 
Cash and cash equivalents at end of period
               
Continuing operations
   
4,303,838
     
4,990,771
 
Discontinued operations
   
-
     
-
 
                 
Cash and cash equivalents of continuing operations at end of period
   
4,303,838
     
4,990,771
 
                 
Supplementary information – continuing operations
               
Cash paid for income taxes
   
-
     
-
 
Cash paid for interest
   
-
     
-
 
                 

See accompanying notes to the condensed consolidated financial statements.
 
REDTONE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 29, 2016 (Unaudited)

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

REDtone Asia, Inc. and subsidiaries (the "Company") are a group of companies in The People's Republic of China ("PRC"). The principal activities of the Company are that of a Telecommunications provider for mobile, fixed and international gateway services. REDtone provides a wide range of telecommunication services, including prepaid and postpaid discounted call services to corporate customers and consumers as well as prepaid mobile air-time top-up. The Company also offers prepaid shopping card services.

The Company's major subsidiaries during the period under review are illustrated as follows:


Name
 
Domicile and date of incorporation
 
Effective ownership
 
Principal activities
REDtone Telecommunication (China) Limited ("REDtone China")
 
Hong Kong
May 26, 2005
 
100%
 
Investment holding
             
REDtone Telecommunications (Shanghai) Limited ("REDtone Shanghai")
 
The PRC
July, 26, 2005
 
100%
 
Provides technical support services to group companies
             
Shanghai Hongsheng Net Telecommunication Company Limited ("Hongsheng") 1, 2
 
The PRC
November 29, 2006
 
100%
 
Marketing and distribution of discounted call services to PRC consumer market
             
Shanghai Huitong Telecommunication Company Limited ("Huitong") 2
 
The PRC
March, 26, 2007
 
100%
 
Marketing and distribution of IP call and discounted call services in the PRC
             
Shanghai Jiamao E-Commerce Company Limited ("Jiamao") 2
 
The PRC
March 21, 2008
 
100%
 
Marketing and distribution of products on the internet
             
Nantong Jiatong Investment Consultant Co., Ltd ("Nantong Jiatong") 2, 3
 
The PRC
May 17, 2011
 
100%
 
Investment holding
             
Shanghai QianYue Business Administration Co., Ltd. ("QBA") 1, 2
 
The PRC
December 12, 2008
 
100%
 
Provision of prepaid shopping-card services in the PRC
             
Shanghai Xin Chang Information Technology Company Limited ("Xin Chang") 2
 
The PRC
January 13, 2006
 
56%
 
Marketing and distribution of IP call and discounted call services in the PRC
             
VMS Technology Limited
 
Hong Kong
September 14, 1998
 
100%
 
Trading of discounted call related equipment and provision of related services
             
RT Communications Ltd
 
BVI
February 24, 2010
 
100%
 
Investment holding
             
Shanghai YuZhong Financial Information Service Co., Ltd ("YuZhong") 2, 4
 
The PRC
July 16, 2014
 
49.8%
 
Investment holding
             
Shanghai YuGuang Automobile Inspection Technology Co., Ltd ("YuGuang") 2, 4
 
The PRC
July 17, 2014
 
59.8%
 
Investment holding
             
Taizhou Haitai Motor Vehicle Inspection Co, Ltd. ("Haitai") 2, 4
 
The PRC
October 31, 2013
 
30.5%
 
Investment holding
             
 
Feng Cheng Motor Vehicle Inspection Co., Ltd. ("FengCheng") 2, 4
 
 
The PRC
February 29, 2012
 
 
30.5%
 
 
Provision of services for motor vehicle technical and emission inspection
             
1 - Disposed of during the fiscal year ended May 31, 2015
2 - Variable interest entities
3 - Deregistered during the fiscal year ended May 31, 2015
4 - Acquired/incorporated during the fiscal year ended May 31, 2015

Nantong Jiatong, Hongsheng and QBA were disposed of July 25, 2014. The related assets held for sale and liabilities as of May 31, 2014 are reclassified in the consolidated balance sheet, while the corresponding results for years ended May 31, 2015 (up to disposal date) and 2014, respectively, are reported as discontinued operations. See also Footnote 4.

Prior to disposal of Hongsheng, the Company transferred its equity interest in Xin Chang to Huitong. The statutory registration was completed in September 2014.

YuZhong, YuGuang, Haitai and FengCheng are new subsidiaries during the fiscal year ended May 31, 2015. See also Footnote 5.
 
NOTE 2 – PRINCIPLES OF CONSOLIDATION

The unaudited interim financial statements of the Company and the Company's subsidiaries (see Note 1) for the three months and nine months ended February 29, 2016 and February 28, 2015 have been prepared pursuant to the rules & regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however the Company believes that the following disclosures are adequate to make the information presented not misleading. All significant intercompany balances and transactions have been eliminated. The functional currency for the majority of the Company's operations is in Chinese Renminbi ("RMB"), while the reporting currency is U.S. Dollar.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company's financial position as of February 29, 2016, the results of its operations and cash flows for the three months and nine months ended February 29, 2016 and February 28, 2015.

The results of operations for the three months and nine months ended February 29, 2016 are not necessarily indicative of the results for a full year period.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Economic and political risk

The Company's major operations are conducted in the PRC. Accordingly, the political, economic, and legal environments in PRC may influence the Company's business, financial condition, and results of operations.

The Company's major operations in the PRC are subject to considerations and significant risks typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic, and legal environment. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.

(b) Cash and cash equivalents

The Company considers all highly liquid investments purchased with original maturities of six months or less to be cash equivalents.

(c) Accounts receivable and other receivables

Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable.


(d) Property, plant and equipment

Property, plant and equipment are carried at cost less accumulated depreciation. The cost of maintenance and repairs is charged to the statement of operations as incurred, whereas significant renewals and improvements are capitalized. The cost and the related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of operations.

The Company provides for depreciation of property, plant and equipment principally by use of the straight-line method for financial reporting purposes. Plant and equipment are depreciated over the following estimated useful lives:

Computer and software
 5 years
Furniture, fixtures and equipment
 5 years
Motor vehicles
 5 years
Leasehold improvements
 5 years
Telecommunication equipment
 10 years

Depreciation expense attributable to continuing operations for the nine months period ended February 29, 2016 and February 28, 2015 amounted to $381,320 and $391,596, respectively. Depreciation expense attributable to discontinued operations for the nine months period ended February 29, 2016 and February 28, 2015 amounted to $nil and $3,689, respectively.

(e) Intangible assets

IT license and software and operating license and are generally amortized on a straight-line basis over the expected periods of benefit, in 20 years. Customer base are amortized on a straight-line basis over 3 years.

The Company performs regular review of identified intangible assets to determine if facts and circumstances indicate that the useful life is shorter than the original Company policies. If such facts and circumstances exist, the Company regularly assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.

Amortization expense attributable to continuing operations for the nine months period ended February 29, 2016 and February 28, 2015 amounted to $118,825 and $106,455, respectively. There is no amortization expense attributable to discontinued operations for both periods.

(f) Available-for-sale investments

Investments in equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognized in the balance sheet at cost less impairment losses.

(g) Accounting for the impairment of long-lived assets

The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

There is a goodwill impairment loss of $377,171 (2015 - Nil) recognized during the nine months ended February 29, 2016.
(h) Income tax

Income taxes are based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. The Company periodically assesses the need to establish valuation allowances against its deferred tax assets to the extent the Company no longer believes it is more likely than not that the tax assets will be fully utilized.

The Company evaluates a tax position to determine whether it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is subject to a measurement assessment to determine the amount of benefit to recognize and the appropriate reserve to establish, if any. If a tax position does not meet the more-likely-than-not recognition threshold, no benefit is recognized.


(i) Fair value of financial instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

 Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

 Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

 Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

We measure the fair value of money market funds and equity securities based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.

(j) Revenue recognition

The Company assesses appropriate revenue recognition policy for each type of operation according to ASC 605-45

Revenue represents the invoiced value of services rendered and receivable during the year. Revenue is recognized when all of the following criteria are met:

☐ Persuasive evidence of an arrangement exists,
☐ Delivery has occurred or services have been rendered,
☐The seller's price to the buyer is fixed or determinable, and
☐ Collectability is reasonably assured

Revenue recognition policy for each of the major products and services:

1. Discounted call services for consumer (EMS) as follow:

☐ Collaboration with CTT – REDtone China is appointed as the sole distributor for EMS and will recognize revenue when airtime is utilized by the consumer and the revenue recognized is on net basis which is computed based on a fixed sharing ratio of the total airtime utilized by consumers after netting of direct traffic termination cost and incidental expenses. REDtone China's role for Business Collaboration with China TieTong Telecommunications (CTT) would be as "Agent" as REDtone China is the sole distributor for EMS brand owned and controlled by CTT; and

☐ Collaboration with other telecommunication providers – REDtone China will act as a discounted consumer call Reseller whereby REDtone China will determine the service and package specification and pricing policies whereas China Unicom acts as a passive termination partner for call traffic.  REDtone China will pay China Unicom solely based on call traffic termination by China Unicom at a prescribed rate (defined as traffic termination costs on the books of REDtone China).  In this regard, REDtone China will recognize the revenue when airtime is utilized by the consumer and the value recognized as revenue is the call charges gross value. REDtone China's role for Business Collaboration with China Unicom would be as "Principal" as China Unicom is playing a passive role as traffic termination partner while REDtone China is fully responsible for the entire management of discounted call services

As this is a prepaid product, there is an expiration date for the product sold. If the airtime is not utilized by the expiration date, which is currently one year from the activation date, it will be deemed expired and revenue will be recognized based on the remaining gross value of the expired prepaid product.

2. Discounted call services for corporate as follow:

☐ Collaboration with CTT – the revenue recognize is the commission earned from distributing the discounted call services to corporate customer; and

☐ Collaboration with other telecommunication providers –the revenue recognized is the commission earned from distributing the discounted call services to corporate customer.

3. Reload services for prepaid mobile – revenue recognized is the commission earned.

4. Discontinued prepaid shopping-card services – revenue recognized is the commission earned.

(k) Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the year. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of February 29, 2016 and February 28, 2015, there were no dilutive securities outstanding.

(l) Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

(m) Retirement benefits

PRC mandates companies to contribute funds into the national retirement system, which benefits qualified employees based on where they were born within the country. The Company pays the required payment for qualified employees of the Company.

(n) Foreign currency translation

The accompanying consolidated financial statements are presented in United States dollars (US$). The functional currencies of the Company are the Hong Kong dollar (HK$) and the Renminbi (RMB), respectively. Capital accounts of the financial statements are translated into United States dollars from HK$ or RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the year. The translation rates are as follows:

   
February 29, 2016
 
May 31, 2015
February 28, 2015
Period end RMB : US$ exchange rate
 
0.1530
 
0.1612
0.1627
Average period RMB : US$ exchange rate
 
0.1577
 
0.1614
0.1625
Period end HK$ : US$ exchange rate
 
0.1286
 
0.1290
0.1290
Average period HK$ : US$ exchange rate
 
0.1289
 
0.1290
0.1290

On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/US$ exchange rate into a flexible rate under the control of the PRC's government.

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

(o) Recent Accounting Pronouncements

The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during the period.  Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company's reported financial position or operations in the near term.

The Company reviews new accounting standards as issued. No new standards had any material effect on these financial statements. The accounting pronouncements issued subsequent to the date of these financial statements that were considered significant by management were evaluated for the potential effect on these consolidated financial statements. Management does not believe any of the subsequent pronouncements will have a material effect on these consolidated financial statements as presented and does not anticipate the need for any future restatement of these consolidated financial statements because of the retro-active application of any accounting pronouncements issued subsequent to February 29, 2016 through the date these financial statements were issued.


NOTE 4 – DISPOSAL OF SUBSIDIARIES AND DISCONTINUED OPERATION

On July 25, 2014, the Company entered into an agreement to dispose of its entire equity interest in Hongsheng, a VIE subsidiary, to Guotai Investment Holdings Limited at a total cash consideration of approximately $4.54 million.

Pursuant to the agreement, Hongsheng shall transfer all its operations, assets and liabilities other than investment in QBA prior to the completion of the above transaction. Therefore, the entire arrangement is to dispose of the shell of Hongsheng together with the entire interest in QBA.

As of the disposal date, QBA's assets and liabilities are summarized as follows:

   
July 25, 2014
 
Assets
     
Cash and cash equivalents
 
$
2,969,661
 
Inventories
   
6,708
 
Accounts receivable
   
525
 
Other receivables and deposits
   
8,892
 
Property, plant and equipment, net
   
5,937
 
Total assets
   
2,991,723
 
         
Liabilities
       
Accounts payable
   
29,699
 
Accrued expenses and other payables
   
17,462
 
Total current liabilities
   
47,161
 
         
Net assets of QBA
   
2,944,562
 
         
 
The results of QBA during the period (up to date of disposal) are summarized as follows:

   
From June 1, 2014 to July 25, 2014
 
       
Revenue
 
$
3
 
Other income and gains
   
164
 
Service costs
   
-
 
Personnel cost
   
(93,580
)
Depreciation expense
   
(3,689
)
Administrative and other expenses
   
(6,916
)
         
Net loss
   
(104,018
)
         
The results of QBA for the nine months years ended February 28, 2015 is reported as discontinued operations in the condensed consolidated statement of income and comprehensive income.

The gain on disposal of QBA is analyzed as follows:

Consideration received
   
4,565,936
 
Less: Net assets of QBA
   
(2,944,563
)
Less: Goodwill arising in the acquisition of QBA
   
(610,386
)
         
Gain on disposal
   
1,010,987
 
         

NOTE 5 – ACQUISITION OF A SUBSIDIARY

On July 16, 2014, Huitong, Mao Hong, a director and nominee shareholder of certain VIEs, and Wei Gang, an independent third party  jointly incorporated YuZhong and the founders owned 49.8%, 25.1% and 25.1% of equity interests in YuZhong, respectively.

On July 17, 2014, Huitong and YuZhong jointly incorporated YuGuang. Huitong and YuZhong owns 20% and 80% of equity interests in YuGuang, respectively.

On September 11, 2014, YuGuang entered into an agreement with Zhou Jin Shan and Chen Xiu Lan to acquire 51% equity interest in Taizhou Haitai Motor Vehicle Inspection Co, Ltd. ("Haitai") from Zhou Jin Shan at a consideration of RMB652,800. Haitai is principally engaged in the provision of motor vehicle inspection service in the PRC. The acquisition was completed in January 2015.

As of the date of acquisition, Haitai has 51% equity interest in FengCheng. FengCheng is principally engaged in the provision of services for motor vehicle technical and emission inspection. Haitai and FengCheng was collectively known as "Haitai Group".

Management has assessed the fair value of the assets and liabilities of Haitai Group as of the acquisition date, and is analyzed as follows:

 
Assets
     
Construction in progress
 
$
1,100,243
 
Other receivables and deposits
   
101,036
 
Cash and cash equivalents
   
1,132
 
     
1,202,411
 
         
Liabilities
       
Accrued expenses and other payables
   
1,736,068
 
     
1,736,068
 
         
Net assets acquired
   
(533,657
)
         
Net assets shared by YuGuang
   
(272,165
)
         
Cash consideration
   
105,006
 
         
Goodwill
   
377,171
 
         
As at February 29, 2016, the car inspection center was still under construction. The Goodwill was fully impaired and charged to operations during the period.
       
         
Reconciliation of net cash used in acquisition
       
Cash consideration paid
   
105,006
 
Less: cash acquired from the transaction
   
(1,132
)
         
Net cash used in acquisition
   
103,874
 

No revenue was generated for the period ended February 29, 2016 and February 28, 2015, respectively.

Expenses incurred by the newly acquired subsidiaries for the nine months ended February 29, 2016 and February 28, 2015 were $66,979 and $nil respectively.

NOTE 6 - CASH AND CASH EQUIVALENTS

As of the balance sheet dates, cash and cash equivalents are summarized as follows:

   
February 29, 2016
   
May 31, 2015
 
             
Cash and bank
 
$
317,947
   
$
800,821
 
Time deposits
   
3,985,891
     
4,261,755
 
                 
Total
 
$
4,303,838
   
$
5,062,576
 

As of the balance sheet dates, the time deposits had a maturity term of less than three months.

NOTE 7 – OTHER RECEIVABLES AND DEPOSITS

Other receivables and deposits as of the dates were summarized as follows:

   
February 29, 2016
   
May 31, 2015
 
             
Deposits
 
$
441,599
   
$
292,985
 
Other receivables
   
117,070
     
68,795
 
                 
Total
 
$
558,669
   
$
361,780
 
 
NOTE 8 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of the balance sheet dates are summarized as follows:

   
February 29, 2016
   
May 31, 2015
 
At cost:
           
   Computer and software
 
$
186,523
   
$
147,213
 
   Telecommunication equipment
   
5,339,426
     
5,473,624
 
   Furniture, fixtures and equipment
   
55,502
     
57,976
 
   Motor vehicles
   
158,694
     
167,175
 
   Leasehold improvement
   
31,418
     
32,556
 
 Construction in progress
   
2,432,431
     
2,502,332
 
     
8,203,994
     
8,380,876
 
Less: Accumulated depreciation
   
(4,716,081
)
   
(4,577,472
)
                 
Property, plant and equipment, net
 
$
3,487,913
   
$
3,803,404
 

Depreciation expense attributable to continuing operations for the nine months ended February 29, 2016 and February 28, 2015 amounted to $381,320 and $391,596 respectively. Depreciation expense attributable to discontinued operations for the nine months period ended February 29, 2016 and February 28, 2015 amounted to $nil and $3,689, respectively.

NOTE 9 – INTANGIBLE ASSETS

Intangible assets as of the balance sheet dates are summarized as follows:

   
February 29, 2016
   
May 31, 2015
 
At cost:
           
   Operating concession
 
$
562,855
   
$
592,934
 
   Customer base
   
76,505
     
80,593
 
   IT license and software
   
2,275,418
     
2,281,786
 
     
2,914,778
     
2,955,313
 
Less: Accumulated depreciation
   
(1,281,441
)
   
(1,178,142
)
                 
Intangible assets, net
 
$
1,633,337
   
$
1,777,171
 

Amortization expense attributable to continuing operations for the nine months ended February 29, 2016 and February 28, 2015 amounted to $118,825 and $106,455, respectively. There is no amortization expense attributable to discontinued operations for both periods.
 
NOTE 10 – GOODWILL

Goodwill as of the balance sheet dates were summarized as follows:

   
February 29, 2016
   
May 31, 2015
 
             
Arising from the acquisition of Haitai Group
 
$
-
   
$
377,171
 
 
NOTE 11 – AMOUNT DUE FROM/(TO) RELATED COMPANIES

As of the balance sheet dates, amount due from a related company that included in the Company's equity accounts were analyzed as follows:

   
February 29, 2016
   
May 31, 2015
 
Fellow subsidiary:
           
  REDtone Technology Sdn. Bhd.
 
$
3,223,971
   
$
3,289,447
 

The amount represents advances to the related company. As of the balance sheet dates, the amount is unsecured, non-interest bearing and is expected to be repaid within 2016.  

 Amount due to a related company as of the balance sheet dates were summarized as follows:

   
February 29, 2016
   
May 31, 2015
 
Fellow subsidiary:
           
  REDtone Telecommunications Sdn Bhd
 
$
160,000
   
$
160,420
 
Non-controlling interests
   
1,782,625
     
1,873,432
 
                 
     
1,942,625
     
2,033,852
 

The amount due to the related company is unsecured, non-interest bearing and has no fixed repayment date.
 
NOTE 12 – ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables as of the balance sheet dates were summarized as follows:

   
February 29, 2016
   
May 31, 2015
 
             
Accrued expenses
 
$
290,357
   
$
344,094
 
Other payables
   
558,661
     
539,365
 
                 
Total
 
$
849,018
   
$
883,459
 

NOTE 13 – DEFERRED INCOME

Deferred income consists of prepaid air-time sold which is yet to be utilized. The basis of revenue recognition for discounted call services is based on actual call charges made by end users. When calls are being made, the amount will be deducted from deferred income to the statement of income, net of call costs and expenses.
 
NOTE 14 – TAXES PAYABLE

Taxes payable at the balance sheet dates are summarized as follows:

   
February 29, 2016
   
May 31, 2015
 
             
Income tax payable
 
$
547,294
   
$
487,044
 
Business tax and other tax payables
   
153,848
     
169,198
 
                 
Total
 
$
701,142
   
$
656,242
 

Business tax represents PRC sales tax imposed upon the Company's services provided in the PRC.  Tax rates range from 3% to 5% depending on the nature of the taxable activities.

Income tax represents PRC income tax. The provision for PRC income tax is based on a statutory rate of 25% of the assessable income of the PRC subsidiaries as determined in accordance with the relevant income tax rules and regulations of the PRC.

NOTE 15 – INCOME TAX INCOME
   
Nine months ended February 29, 2016
   
Nine months ended February 28, 2015
 
             
Current income tax in PRC and Hong Kong
 
$
90,553
   
$
16,869
 
Deferred tax income
   
(4,648
)
   
(4,797
)
                 
Total
 
$
85,905
   
$
12,072
 

On April 29, 2014, RTSH obtained a tax benefit which the income tax for 2013 and 2014 calendar year is exempt and the income tax for 2015, 2016 and 2017 calendar year will be subject to half rate deduction.

A reconciliation of the expected tax with the actual tax expense is as follows:

   
Nine months ended February 29, 2016
   
Nine months ended February 28, 2015
 
             
Income before provision for income taxes
 
$
(848,917
)
 
$
(457,306
)
                 
Expected PRC income tax expense at statutory tax rate of 25%
   
(212,229
)
   
(114,326
)
Different tax rate for PRC/Hong Kong local authority
   
9,861
     
7,586
 
Expenses not deductible for tax
   
181,279
     
13,933
 
Utilization of tax loss brought forward
   
(29,719
)
   
(32,677
)
Tax loss not provided for deferred tax
   
136,713
     
137,256
 
                 
Total
 
$
85,905
   
$
12,072
 

 (i) All PRC subsidiaries are subject to PRC tax. The provision for PRC income tax is based on a statutory rate of 25% of the assessable income of the PRC subsidiaries as determined in accordance with the relevant income tax rules and regulations of the PRC.

(ii) Hong Kong subsidiaries are subject to Hong Kong profits tax. The provision for Hong Kong profits tax is based on a statutory rate of 16.5% of assessable profits in Hong Kong.

(iii) BVI subsidiaries are not subject to profits tax.
 
NOTE 16 – VARIABLE INTEREST ENTITIES ("VIEs")

On April 30, 2007, the Company entered into the loan agreements with Mao Junbao ("MJ") and Mao Hong ("MH ") for the establishment of Huitong and on April 30, 2007, an equity pledge agreement which provides that MJ and MH would pledge all their equities in Huitong to REDtone Shanghai.

During the year, Huitong acquired YuZhong, YuGuang, Haitai and FengCheng, as subsidiaries of the Company. See also Footnote 5.

On February 29, 2006, the Company entered into loan agreements with Huang Bin ("HB") and MH for the establishment of Hongsheng and on February 29, 2006, an equity pledge agreement which provides that HB and MH will pledge all their equities in Hongsheng to the Company and REDtone Shanghai. The agreement also provides that control of Hongsheng by the Company shall take effect from June 1, 2007.

On May 24, 2011, Hongsheng had entered into the Nominee Agreement among Wang Jianping and Xu Lanying provided that Hongsheng would commission Wang Jianping and Xu Lanying to establish Nantong Jiatong and the nominee shareholders of Nantong Jiatong is Wang Jianping and Xu Lanying.

On May 24, 2011, the Company entered into the loan Agreement with Nantong Jiatong to extend a loan of RMB22,000,000 for the additional capital injection into Hongsheng for establishment of QBA, an equity pledge agreement entered by and amongst the Company, Nantong Jiatong and Hongsheng, provided that Nantong Jiatong would pledge all its equities in Hongsheng to the Company.

Hongsheng and QBA were disposed on July 25, 2014. All equity interests in subsidiaries held by these companies were transferred to Huitong before disposal. All related loans under the above arrangements were settled before disposal.

Although the Company is not the shareholder of the above VIE subsidiaries, the Company has determined that it is the primary beneficiary of these entities, as the Company has controlling voting powers and entitled to receive the benefit from operations of these entities. Hence, these companies are identified as VIEs and are consolidated as if subsidiaries of the Company.

We did not identify any additional VIEs in which we hold a significant interest.

The total consolidated VIE assets and liabilities reflected on the Company's balance sheet are as follows:

   
February 29, 2016
   
May 31, 2015
 
Assets
           
Cash and cash equivalents
 
$
131,460
   
$
482,559
 
Inventories
   
3,750
     
3,951
 
Accounts receivable
   
870,824
     
825,790
 
Other receivables and deposits
   
528,946
     
332,497
 
Goodwill
   
-
     
372,019
 
Property, plant and equipment, net
   
2,867,336
     
2,845,078
 
Intangible assets, net
   
386,697
     
443,700
 
                 
Total assets (not include amount due from intra-group companies and related parties)
   
4,789,013
     
5,305,594
 
                 
Liabilities
               
Deferred income
   
1,272,086
     
794,435
 
Accounts payable
   
252,976
     
760,409
 
Accrued expenses and other payables
   
334,121
     
1,163,356
 
Taxes payable
   
88,215
     
23,005
 
Total liabilities (not include amount due to intra-group companies and related parties)
   
1,947,398
     
2,741,205
 
                 


The results of VIEs (QBA is included in comparative figures) are as follows, and are included in the consolidated statements of income of the Company:

   
Nine months ended February 29, 2016
   
Nine months ended February 28, 2015
 
             
Revenue
 
$
2,306,721
   
$
4,440,095
 
Other income and gains
   
1,778
     
1,018,755
 
Service costs (Not including service costs payable to intra-group companies)
   
(2,366,258
)
   
(3,579,001
)
Personnel cost
   
(119,499
)
   
(302,545
)
Depreciation expense
   
(40,244
)
   
(24,181
)
Amortization expense
   
(17,359
)
   
(17,660
)
Administrative and other expenses
   
(213,510
)
   
(285,996
)
                 
Income before provision for income taxes (Not including service costs payable to intra-group companies)
   
(448,371
)
   
1,249,467
 
Provision for income taxes
   
(62,578
)
   
(1
)
                 
Net income
   
(510,949
)
   
1,249,466
 

Under the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs and can have assets transferred freely out of the VIEs without restrictions. Therefore, the Company considers that there is no asset of VIEs that can only be used to settle obligations of the respective VIEs, except for registered capital and PRC statutory reserves of VIEs as of February 29, 2016. Since the VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of the Company. There is currently no contractual arrangement that would require the Company to provide additional financial support to the VIEs. As the Company is conducting certain businesses mainly through its VIEs, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.
 
NOTE 17 – CAPITAL COMMITMENTS

Capital commitment that related to the Company's car inspection business is as follows:-

   
February 29, 2016
   
May 31, 2015
 
             
Contracted but not provided for property, plant and equipment - within 1 year
 
$
2,644,336
   
$
2,785,647
 

 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This quarterly report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "REDtone believes," "management believes" and similar language. The forward-looking statements are based on the current expectations of RTAS and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. The actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.
 
Investors are also advised to refer to the information in our filings with the Securities and Exchange Commission, specifically Forms 10-KSB, 10-QSB and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks and uncertainties or potentially inaccurate assumptions.
 
Except as otherwise indicated by the context, references in this Form 10-Q to "RTAS," "we," "us," "our," "the Registrant", "our Company," or "the Company" are to REDtone Asia, Inc., a Nevada corporation and its consolidated subsidiaries. Unless the context otherwise requires, all references to (i) "BVI" are to British Virgin Islands; (ii) "PRC" and "China" are to the People's Republic of China; (iii) "U.S. dollar," "$" and "US$" are to United States dollars; (iv) "RMB" are to Yuan Renminbi of China; (v) "RM" are to Malaysian Ringgit; (vi) "Securities Act" are to the Securities Act of 1933, as amended; and (vii) "Exchange Act" are to the Securities Exchange Act of 1934, as amended.
 

 
Business Overview

We are principally involved in the business of offering discounted call services for end users and corporate segment and paperless reload services for prepaid mobile air-time reload for end users in Shanghai covering all three major telecommunication operators namely China Mobile, China Unicom and China Telecom.

On July 25, 2014, REDtone China entered into a Share Sale Agreement ("SSA") with Guotai Investment Holdings Limited ("Guotai") for the divestment of Hongsheng for a total cash consideration of RMB28,000,000 for the purpose of Guotai acquiring the third party payment license, held by its wholly owned subsidiary, QBA.

Hongsheng is conducting telco related services in Shanghai. These telco related businesses is transferred to Huitong, a subsidiary of REDtone China from the Completion date. Therefore, all existing telco businesses of Hongsheng is still remain within the REDtone Group.
 
Critical Accounting Policies and Estimates

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("US GAAP"). US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
 
We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our condensed consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Company has adopted a revenue recognition policy for each type of operation according to ASC 605-45.

Revenue represents the invoiced value of services rendered and receivable during the year. Revenue is recognized when all of the following criteria are met:

-
Persuasive evidence an arrangement exists;
-
Delivery has occurred or services have been rendered;
-
The seller's price to the buyer is fixed or determinable; and
-
Collectability is reasonably assured.

Revenue recognition policy for each of the major products and services:

1.
Discounted call services for consumer (EMS) as follows:

 
· Collaboration with China Tie Tong Telecommunications ("CTT") – REDtone China is appointed as the sole distributor for EMS and will recognize revenue when airtime is utilized by the consumer and revenue is recognized on a net basis which is computed based on a fixed sharing ratio of the total airtime utilized by consumers after netting the direct traffic termination costs and incidental expenses. REDtone China's role for Business Collaboration with CTT is as an "Agent" as REDtone China is the sole distributor for the EMS brand owned and controlled by CTT; and

 
· Collaboration with other telecommunication providers – REDtone China will act as a discounted consumer call Reseller whereby REDtone China determines the service and package specification and the pricing policy whereas China Unicom acts as a passive termination partner for call traffic. REDtone China will pay China Unicom solely based on call traffic termination by China Unicom at a prescribed rate (defined as traffic termination cost on the books of REDtone China). In this regard, REDtone China will recognize revenue when airtime is utilized by the consumer and the revenue recognized is the gross value of the call charges. REDtone China's role for Business Collaboration with China Unicom is that of "Principal" as China Unicom is playing a passive role as the traffic termination partner while REDtone China is fully responsible for the entire management of the discounted call services

As this is a prepaid product, there is an expiration date for the product sold. If the airtime is not utilized by the expiration date, which is currently one year from the activation date, the product will be deemed to be expired and the revenue recognized at the time is the remaining gross value of the expired prepaid product.
 
2.
Discounted call services for corporate consumers is as follows:

 
· Collaboration with CTT – the revenue recognized is the commission earned from distributing the discounted call services to corporate customers; and

 
· Collaboration with other telecommunication providers –the revenue recognized is the commission earned from distributing the discounted call services to corporate customers.

3.
Reload services for prepaid mobile services – revenue recognized is the commission earned.

4.
Discontinued prepaid shopping-card services – revenue recognized is the commission earned.
 
Recent Accounting Pronouncements

The Company does not expect that the adoption of any recent accounting pronouncements will have any material impact on its financial statements.

Year-to-date Results of Operations

Year-to-date Results for Nine-month period ended February 29, 2016 as Compared to period ended February 28, 2015

The following table summarizes the results of our operations during the nine-month periods ended February 29, 2016 and February 28, 2015, and associated percentage changes for comparisons purposes.


Continuing operations

Results of continuing operations for 9-month period ended February 29, 2016 compared to 9-month period ended February 28, 2015

   
Nine-month period ended
     
   
February 29,
2016
   
February 28,
2015
   
Increase/(Decrease) from previous year
 
 
 Revenue
   
4,514,988
     
6,097,699
     
(1,582,711
)
   
-26
%
 Other income and gains
   
83,053
     
151,229
     
(68,176
)
   
-45
%
 Service costs
   
(3,260,970
)
   
(4,858,845
)
   
(1,597,875
)
   
-33
%
 Personnel cost
   
(548,191
)
   
(626,758
)
   
(78,567
)
   
-13
%
 Depreciation expense
   
(381,320
)
   
(391,596
)
   
(10,276
)
   
-3
%
 Amortization expense
   
(118,825
)
   
(106,455
)
   
12,370
     
12
%
 Administrative and other expenses
   
(1,137,652
)
   
(722,580
)
   
415,072
     
57
%
                                 
 Loss before provision for income taxes
   
(848,917
)
   
(457,306
)
   
391,611
     
86
%
 Provision for income taxes
   
(85,905
)
   
(12,072
)
   
73,833
     
612
%
                                 
 Net loss before non-controlling interest
   
(934,822
)
   
(469,378
)
   
465,444
     
99
%
                                 
 
Revenues. The Company generated revenue of $4,514,988 in the first nine months of the fiscal year ending May 31, 2016, representing a 26% decrease as compared with the preceding year's corresponding quarters. The decrease in revenues was mainly due to lower consumption from the competitive market of $1,582,711.
 

Other income and gains.  During the first nine month of the fiscal year ending May 31, 2016, the Company recorded other income and gains of $83,053, a decrease of $68,176 or 45% compared with the preceding year's corresponding quarter. The decrease was due to decrease in interest income from time deposits.

Service cost. Service costs from operations for the first nine months in fiscal year 2016 of $3,260,970 reflected a decrease of $1,597,875 or 33% over the preceding year quarter ended May 31, 2015. The decrease in service costs was mainly due to decrease in the traffic consumption.

Personnel expenses.  The personnel expenses have decreased by 13% or $78,567 to $548,191 for the first nine month of the fiscal year ending May 31, 2016. This is mainly due to exclusion of personnel from QBA which we have disposed off the said company on July 25, 2014.

Depreciation and amortization expenses. Depreciation and Amortization expense is generally comparable to the corresponding period of last fiscal year.
 
Administrative and other operating expenses.  The administrative and other operating expenses have increased by 57% or $415,072 to $1,137,652 for the first nine months of the fiscal year ending May 31, 2016. This is mainly due to the Company has fully impaired its Goodwill on the FengCheng of $377,171 which have yet to complete its construction.

Loss before provision for income taxes.  For the quarter under review, the decreased in revenues and the impairment of goodwill has caused the net loss before provision for income taxes stood at $848,917 as compared to a loss of $457,306 over the preceding year's corresponding quarter.

Provision for income taxes.  For the current quarter under review, there is an income tax expense of $85,905 compared to income tax expense of $12,072 over the preceding quarter's corresponding quarter.

Net loss before non-controlling interest. For the quarter under review, the decreased in revenue and the impairment of goodwill has caused the net loss before non-controlling interest stood at $934,822 as compared to a loss of $469,378 over the preceding year's corresponding quarter.


Three-month period Results of Operations

Three-month period results ended February 29, 2016 as Compared to period ended February 28, 2015

The following table summarizes the results of our operations during the three-month periods ended February 29, 2016 and February 28, 2015, and associated percentage changes for comparisons purposes.


Continuing operations

Results of continuing operations for 3-month period ended February 29, 2016 compared to 3-month period ended February 28, 2015

   
Three-month period ended
     
   
February 29,
2016
   
February 28, 2015
   
Increase/(Decrease) from previous year
 
 
 Revenue
   
1,364,041
     
1,536,250
     
(172,209
)
   
-11
%
 Other income and gains
   
10,296
     
20,125
     
(9,829
)
   
-49
%
 Service costs
   
(894,332
)
   
(1,267,397
)
   
(373,065
)
   
-29
%
 Personnel cost
   
(234,699
)
   
(250,330
)
   
(15,631
)
   
-6
%
 Depreciation expense
   
(101,380
)
   
(133,622
)
   
(32,242
)
   
-24
%
 Amortization expense
   
(45,901
)
   
(33,240
)
   
12,661
     
38
%
 Administrative and other expenses
   
(672,878
)
   
(228,194
)
   
444,684
     
195
%
                                 
 Loss before provision for income taxes
   
(574,853
)
   
(356,408
)
   
218,445
     
61
%
 Provision for income taxes
   
2,925
     
(19,460
)
   
N/
A
   
N/
A
                                 
 Net loss before non-controlling interest
   
(571,928
)
   
(375,868
)
   
196,060
     
52
%
                                 


Revenues. The Company generated revenue of $1,364,041 in the third three months of the fiscal year ending May 31, 2016, representing a 11% decrease as compared with the preceding year's corresponding quarters. The decrease in revenues was mainly due to lower consumption from the competitive market of $172,209.

Other income and gains.  During the third three month of the fiscal year ending May 31, 2016, the Company recorded other income and gains of $10,296, a decrease of $9,829 or 49% compared with the preceding year's corresponding quarter. The decrease was due to decrease in interest income from time deposits.

Service cost. Service costs from operations for the third three months in fiscal year 2016 of $894,332 reflected a decrease of $373,065 or 29% over the preceding year quarter ended May 31, 2015. The decrease in service costs was mainly due to decrease in the traffic consumption.

Personnel expenses.  The personnel expenses have decreased by 6% or $15,631 to $234,699 for the third three month of the fiscal year ending May 31, 2016. This is mainly due to exclusion of personnel from QBA which we have disposed off the said company on July 25, 2014.

Depreciation and amortization expenses. Both the total depreciation and amortization expenses are generally comparable to the corresponding period of last fiscal year due to some reclassification.

Administrative and other operating expenses.  The administrative and other operating expenses have increased by 195% or $444,684 to $672,878 for the third three months of the fiscal year ending May 31, 2016. This is mainly due to the Company has fully impaired its Goodwill on the FengCheng which have yet to complete its construction.

Loss before provision for income taxes.  For the quarter under review, the decreased in revenues has caused the net loss before provision for income taxes stood at $574,853 as compared to a loss of $356,408 over the preceding year's corresponding quarter.

Provision for income taxes.  For the current quarter under review, there is an income tax income of $2,925 compared to income tax expense of $19,460 over the preceding quarter's corresponding quarter.

Net loss before non-controlling interest.  For the quarter under review, the decrease in the group revenue has caused the net loss before non-controlling interest stood at $571,928 as compared to a loss of $375,868 over the preceding year's corresponding quarter.
 
Liquidity and Capital Resources.

Cash
 
Our cash balance at February 29, 2016 was $4,303,838, representing a decrease of $758,738 compared to our cash balance of $5,062,576 at May 31, 2015.

Cash Flow (before effect of exchange rate changes).

 
 
February 29, 2016
   
February 28, 2015
     
+/-
 
Net cash (used in)/ provided by operating activities
 
$
(323,666
)
 
$
832,558
     
N/
A
Net cash (used in)/ provided by investing activities
 
$
(191,116
)
 
$
2,702,511
     
N/
A
Net cash used in financing activities
 
$
(91,227
)
 
$
(1,369,688
)
   
(1,278,461
)
Net (decrease)/increase in cash and cash equivalents
   
(606,009
)
   
2,165,381
     
N/
A

Net cash used in operations during the nine months ended February 29, 2016 amounted to $323,666 as compared to net cash provided by operations of $832,558 in the same period of FY2015. The dramatic increase in net cash used in operating activities during the period under review is mainly due to a lower revenue and the impairment of goodwill.

Net cash used in investing activities for the nine months period ended February 29, 2016 amounted to $191,116 as compared to net cash provided by investing activities of $2,702,511 in the same period of FY2015. The net cash used in the nine months period ended February 29, 2016 mainly due to additional capital expenditure on business related office equipment. The net cash provided in the same period of FY2015 mainly represents consideration received for the disposal of QBA during the quarter.
 

There was net cash used in financing activities of $91,227 for the nine months ended February 29, 2016. The net cash used in the nine months period ended February 29, 2016 is mainly due to settlement among the related parties. The net cash used in financing activities of $1,369,688 in the same period of FY2015 is largely due to uplift of time deposits to repay amount due to QBA.

Working Capital
 
Our working capital was $698,748 at February 29, 2016

At February 29, 2016, we had stockholders' equity of $6,322,274; total assets of $10,858,331 and total current liabilities of $5,033,822.

We do not currently anticipate any material capital expenditures for our existing operations. We do not currently anticipate purchasing or leasing any plant and equipment during approximately the next twelve (12) months.

We do not believe that inflation has had a material effect on our results of operations. However, there can be no assurances that our business will not be affected by inflation in the future.

We have no off balance sheet arrangements.

Discontinued Operations

Results of discontinued operations for nine-month period ended February 29, 2016 compared to nine-month period ended February 28, 2015

   
Nine-month period ended
     
   
February 29, 2016
   
February 28, 2015
   
Increase/(Decrease) from previous year
 
 Revenue
   
-
     
3
     
(3
)
   
-100
%
 Other income and gains
   
-
     
164
     
(164
)
   
-100
%
 Personnel cost
   
-
     
(93,580
)
   
(93,580
)
   
-100
%
 Depreciation expense
   
-
     
(3,689
)
   
(3,689
)
   
-100
%
 Administrative and other expenses
   
-
     
(6,916
)
   
(6,916
)
   
-100
%
                                 
 Loss before provision for income taxes
   
-
     
(104,018
)
   
(104,018
)
   
-100
%
 Provision for income taxes
   
-
     
-
     
-
     
N/
A
                                 
 Net loss before non-controlling interest
   
-
     
(104,018
)
   
(104,018
)
   
-100
%
                                 

Revenues. The Company generated marginal revenue of $3 in the preceding year's corresponding quarter mainly due to the cessation business of the company on July 25, 2014.

Other income and gains.  During the first nine months of the preceding year's corresponding quarter, the Company recorded other income and gains of $164.

Personnel expenses.  The personnel expenses of the preceding year's corresponding quarter was $93,580. This is mainly due to lay-off manpower expenses incurred during the disposal of QBA.

Loss before provision for income taxes.   The net loss before provision for income taxes stood at $104,018 in the preceding year's corresponding quarter.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to various market risks arising from adverse changes in market rates and prices, such as foreign exchange fluctuations and interest rates, which could impact our results of operations and financial position. We do not currently engage in any hedging or other market risk management tools, and we do not enter into derivatives or other financial instruments for trading or speculative purposes.
 
 
Foreign Currency Exchange Rate Risk
 
Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies in Chinese Renminbi ("RMB"), Malaysian Ringgit ("RM") and Hong Kong Dollar ("HK$") could adversely affect our financial results. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Selling, marketing and administrative costs related to these sales are largely denominated in the same respective currency, thereby mitigating our transaction risk exposure. We therefore believe that the risk of a significant impact on our operating income from foreign currency fluctuations is not substantial. However, for sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases and if we price our products in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase went into effect. If we price our products in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our price not being competitive in a market where business is transacted in the local currency. All of our sales and expenses denominated in foreign currencies are denominated in the RMB, RM and HK$. Our principal exchange rate risk therefore exists between the U.S. dollar and these currencies. Fluctuations from the beginning to the end of any given reporting period result in the re-measurement of our foreign currency-denominated receivables and payables, generating currency transaction gains or losses that impact our non-operating income/expense levels in the respective period and are reported in other (income) expense, net in our combined consolidated financial statements. We do not currently hedge our exposure to foreign currency exchange rate fluctuations. We may, however, hedge such exposure to foreign currency exchange rate fluctuations in the future.

Interest Rate Risk

Changes in interest rates may affect the interest paid (or earned) and therefore affect our cash flows and results of operations. However, we do not believe that this interest rate change risk is significant.
 
Inflation
 
Inflation has not had a material impact on the Company's business in recent years.
 
Currency Exchange Fluctuations
 
The Company's revenues and its expenses are denominated in RMB, RM and HK$. The value of these foreign currency-to-U.S. dollars may fluctuate and is affected by, among other things, changes in political and economic conditions. Since 1994, the conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People's Bank of China, which are set daily based on the previous day's inter-bank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of RMB to U.S. dollars had generally been stable and RMB had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of RMB to the U.S. dollar. Under the new policy, RMB may fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently there has been increased political pressure on the Chinese government to decouple the RMB from the United States dollar. At the recent quarterly regular meeting of People's Bank of China, its Currency Policy Committee affirmed the effects of the reform on RMB exchange rate. Since February 2006, the new currency rate system has been operated; the currency rate of RMB has become more flexible while basically maintaining stable and the expectation for a larger appreciation range is shrinking. The Company has never engaged in currency hedging operations and has no present intention to do so.
 
Concentration of Credit Risk
 
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions as described below:
 
1. The Company's business is characterized by new product and service development and evolving industry standards and regulations. Inherent in the Company's business are various risks and uncertainties, including the impact from the volatility of the stock market, limited operating history, uncertain profitability and the ability to raise additional capital.

2. The Company's revenue is deriving from China and Hong Kong. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition.
 
3. If the Company is unable to derive any revenues from these countries, it would have a significant, financially disruptive effect on the normal operations of the Company.
 
 
ITEM 4T. CONTROL AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls were effective as of the end of the period covered by this annual report.

(b) Changes in Internal Controls. There have been no changes in our internal controls over financial reporting during the period ended February 29, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

(c) Management's Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act, as amended. The Company's internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company's financial reporting and the preparation of financial statements in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's consolidated financial statements.

Internal control over financial reporting, no matter how well designed, has inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company's internal control over financial reporting as of February 29, 2016. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (1992).

Based on the Company's processes and assessment, as described above, management has concluded that, as of February 29, 2016, the Company's internal control over financial reporting was effective.
 
PART II - OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS

The Company may from time to time be involved in various claims, lawsuits, and disputes with third parties, actions involving allegations of discrimination, or breach of contract actions incidental to the operation of its business. The Company is not currently involved in any such litigation that it believes could have a materially adverse effect on its financial condition or results of operations.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There have been no unregistered sales of equity for the quarter ended February 29, 2016.

 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
There have been no material defaults for the quarter ended February 29, 2016.
 
ITEM 4. [REMOVED AND RESERVED]
 
 
ITEM 5. OTHER INFORMATION
 
The Company has evaluated for disclosure all subsequent events occurring through April 8, 2016, the date the financial statements were issued.
 
ITEM 6. EXHIBITS
 
The following exhibits are furnished as part of the Quarterly Report on Form 10-Q:

Exhibit
Number
Description
31.1
Certification of Chief Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:  April 14, 2016
REDtone Asia, Inc.
 
Dated:  April 14, 2016
REDtone Asia, Inc.
 
By:
/s/ Chuan Beng Wei
 
By:
/s/ Hui Nooi Ng
Name:
Chuan Beng Wei
 
Name:
Hui Nooi Ng
Title:
Chief Executive Officer
 
Title:
Chief Financial Officer
 
(Principal Executive Officer)
   
(Principal Financial Officer)
 
 
26